I use this blog to gather information and thoughts about invention and innovation, the subjects I've been teaching at Stanford University Continuing Studies Program since 2005.
The current course is Principles of Invention and Innovation (Summer '17).
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Monday, July 23, 2012

(BN) EBay Skirts Cash Repatriation With Bond Issue: Corporate Finance

EBay Inc. (EBAY) is taking advantage of record low interest rates to raise domestic funds it may use to reward shareholders while avoiding U.S. repatriation tax on the 87 percent of its cash held overseas.

The Internet marketplace, whose borrowing costs are about half that of other technology and electronic firms, paid a rate that's less than 90 percent of all investment-grade issues this year with a four-part offering on July 19, according to data compiled by Bloomberg. The San Jose, California-based company had $8 billion of cash on June 30, about $7 billion of which was outside the U.S.

While EBay has more than doubled in value since July 2009 by funneling money into its payments business, Chief Financial Officer Bob Swan said in a February 2011 investor presentation that overseas earnings inhibited its ability to distribute cash to shareholders. Proceeds from the new bonds may allow EBay to pay off outstanding debt and repurchase stock while avoiding a repatriation tax, according to Madison Investment Holdings Inc.

"It's a no-brainer," Jason Paraschac, an analyst at Fitch Ratings in New York, said in a telephone interview. "Look at the present value of the debt issuance versus repatriating cash and paying that tax bill. The math is pretty quick."

Yields Decline

Average yields on EBay debt dropped to 1.14 percent last week from 1.81 percent at year-end as borrowing costs for U.S. investment-grade issuers fell to a record 3.06 percent on July 20, according to Bank of America Merrill Lynch index data. That compares with a 1.56 percent yield on higher-rated Microsoft Corp. (MSFT) and a 2.24 percent average among peers in Bank of America's technology and electronics index.

Of the more than 200 issues of five-year dollar debt sold by companies rated above Baa3 by Moody's Investors Service, the auction runner for everything from artillery shells to Zen gardening kits paid the fifth-lowest coupon with its $1 billion of 1.35 percent securities due in 2017, Bloomberg data show. 3M Co. (MMM), the maker of Scotch tape and Post-It notes, paid the lowest with $650 million of 1 percent debt on June 21.

Amanda Miller, a spokeswoman at EBay, declined to comment on how the company plans to use proceeds from its bond sale.

The company's stock dropped 3.3 percent to $43.39 at 11:28 a.m. in New York. Yields on the 2017 notes increased three basis points to 1.29 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The July 19 offering also included $250 million of 0.7 percent, three-year notes, $1 billion of 2.6 percent, 10-year obligations and $750 million of 4 percent, 30-year debentures. Those coupons are lower than at least nine out of every 10 similar-maturity bond sales in 2012, Bloomberg data show.

'Best Times'

"They are being opportunistic to catch the window and increase their onshore cash," which may be used for share repurchases, Colin Gillis, an analyst at electronic brokerage BGC Partners LP in New York, said in a telephone interview. "This is probably one of the best times to be issuing debt if you're a high-quality, high-cash-flow company."

EBay ranks higher in free cash generation than all Internet software and services firms with more than $500 million of debt except Google Inc. (GOOG), Bloomberg data show. Its $1.92 billion of funds earned in the last four quarters that it can use to reward shareholders through dividends or stock buybacks, to reinvest in the company or to pay down debt is more than double that of Facebook Inc. (FB), which has a larger market value than EBay.

Chief Executive Officer John Donahoe has been ramping up investments in technology meant to help EBay's fastest-growing unit PayPal, which now accounts for 43 percent of revenue, compared with 28 percent when he took the helm in 2008.

PayPal Bet

The CEO is betting PayPal, traditionally an online-only payments servicer, can more directly compete with Visa Inc. and Mastercard Inc. by allowing in-store purchases at partners such as Home Depot Inc. About 95 percent of retail purchases are done offline, the U.S. Department of Commerce said in a May 17 report.

"They could use the cash to further investments on the payments side, particularly offline," Kerry Rice, a San Francisco-based analyst at Needham & Co., said in a telephone interview. "Those are areas they want to build out and grow as fast as they can because there's tremendous opportunity and competition is pretty stiff."

More than half of EBay's $11.7 billion of sales in 2011 came from outside the U.S., Bloomberg data show. That saddles the company with foreign assets that may be subject to U.S. taxes if they're moved inside the country and hinders EBay's ability to return money to shareholders.

'Wonderful Benefit'

"A huge chunk of our cash and our cash flows are offshore," EBay's Swan said at Morgan Stanley's Technology, Media & Telecom Conference in February 2011. "That inhibits our flexibility a bit right now to think about alternative redistribution strategies like a dividend."

The company continues to work on ways to "get the wonderful benefit of an extremely low tax rate, but also get our cash geographically where we would like it to be to enable us to acquire and redistribute cash effectively," he said.

Under current law, American companies can defer federal income taxes on most overseas earnings indefinitely. When they do return to the U.S., they're taxed at the corporate rate of 35 percent -- with credits for foreign income taxes paid. Companies paying little overseas face higher U.S. tax bills upon repatriation and may save money by borrowing instead.

Microsoft, which Janney Montgomery Scott LLC estimates holds most of its cash overseas, sold $4.75 billion of bonds in September 2010 to help pay for dividends and share repurchases as investment-grade borrowing costs dropped to a then-record 3.718 percent.

Commercial Paper

EBay will probably use proceeds from its debt sale to pay down its commercial paper balance with the majority used to fund share buybacks, said Madison Investment's Alan Shepard.

"Issuing the debt is directly avoiding the repatriation tax in a legal way," Shepard, whose firm oversees about $16 billion and owns EBay bonds, said in an e-mail. The difference between the company's borrowing cost and the U.S. tax rate "makes it an easy decision for a corporate treasurer to make," he said.

EBay repurchased about $355 million of its stock in the second quarter and last week authorized an additional $2 billion of buybacks.

Proceeds from the offering also leave EBay prepared with funds for a U.S. acquisition, according to Janney Montgomery Scott's Jody Lurie. EBay agreed to buy GSI Commerce Inc., which manages website inventory for retailers such as Levi Strauss & Co. and Toys R Us Inc., for about $2.4 billion five months after raising $1.5 billion in its debut offering in October 2010, Bloomberg data show. EBay said July 18 that it doesn't anticipate any "meaningful" deal activity in the near term.

"This could be indicative of shareholder-friendly measures, or an expansionary plan in the pipeline," Lurie, a corporate credit analyst in Philadelphia, said in a telephone interview. "Clearly tapping the markets now is a lot more attractive than cutting out 35 percent of the majority of your cash."